Dave Kauppi is the editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure. Contact (630) 325-0123, Dave Kauppi , or MidMarket Capital

Wednesday, September 24, 2008

Selling the Family Business - A Single Buyer is a Prescription for Failure

Many business owners get approached by a single buyer with an unsolicited offer to buy the business. This post discusses the pitfalls of entertaining this single buyer and what to do to improve your odds of getting a fair outcome.

When dealing with only one buyer, he is right. When there are multiple suitors, competitive market forces are allowed to function properly and true business value is established. I am often asked by a business owner what he should do when he is approached by an unsolicited offer. As a general rule, these buyers are only interested if they can get a bargain and limit the process to themselves as the only buyer.

First question I would ask the potential seller is, do you know the value of your business? If he says yes, my next question would be, how do you know? Have you had a recent valuation? Are you familiar with other comparable transactions? Are there rule of thumb valuation multiples for your business? Are you aware of any strategic value components your company may possess? Are you familiar with a discounted cash flow and terminal value approach to valuation?

If he feels comfortable with the value of his business, would this value be adequate for his financial future? What if a buyer was willing to meet his value criteria, but the seller were asked to take some as an earn out or some as a seller note? What offer would induce this owner to change his exit plans, assuming he was not already for sale?

In most cases, the buyer is very aware of the market and the owner is not nearly as well informed. The buyer most likely has made similar overtures to three to six other companies and is attempting to bring one bargain to closing. Because he has multiple opportunities, he has the leverage.

When talking to business owners who have gone through this unfortunate dance with a single buyer, several patterns repeat themselves. The first is that the seller is unable to pin the buyer down on the price and terms even after several months of buyer tire kicking. They are vague and evasive. They reschedule and delay meetings. They drag the process out. They introduce a partner deep into the process who starts hacking away at the terms and the deal shrinks. They discover minor issues in due diligence and act like there should be deal term and price adjustments. The seller gets deal fatigue.

The single buyer is emotionally detached from this process and thinks it is just part of his deal making skill. He is doing the same thing with multiple business owners simultaneously who have a much different emotional connection to the product of their life's work. The buyer is behaving badly and the owner really has no leverage to make the buyer behave. Most of the time the owner will simply blow up the deal after wasting months of time and a great deal of emotional strain. Sometimes he just caves in and sells out at the newly adjusted lower price. What a terrible outcome.

How should the business owner handle this? First answer is my company is not for sale. That usually scares the bottom feeders off because you are establishing a point of strength that you do not need to sell. Of course the buyer will say that everything is for sale. The next step would be to get mutual non disclosures executed and if you are sharing financials, you have the right to request his financials to make sure he has the financial ability to afford you. If it is a public company, you can check the public records for financials.

You really do not want to let the potential buyer do much more looking until he has submitted a qualified letter of intent. That basically says that if we do our due diligence and find out that everything you have told us checks out and we do not find any material surprises, we are willing to pay this much and on these terms for your company. Why would you let another company tear yours apart without knowing that their offer is acceptable to you once they do?

These are good steps, but I still have not solved your problem, leverage. You only have one buyer and you really have no pricing or negotiating leverage. For that you need multiple buyers. A business owner who has to run his business, which is already more than a full time job, normally can only process one buyer at a time. Therefore no leverage, no pricing power, no competition, no good result.

For that you need multiple buyers. To accomplish that you need a merger and acquisition advisor or business broker or investment banker, depending on the size and complexity of the potential transaction. When we are contacted by an owner that has one of these buyers in pursuit, we simply throw that buyer in to the process. When it becomes evident that this is going to become a competitive buying process, they head for easier territory pretty quickly. In our many years of doing this and in the twenty five year history of my prior firm, in only one case did the original unsolicited buyer end up being the winner. And that final price was 35% greater than his original offer.

The unsolicited offer is originally attractive to the business owner because he believes that he will net much more from the transaction if he can avoid paying the investment banking fees. The practical reality is that being sort of, kind of for sale will depreciate your company's value. Either tell these buyers to go away completely or tell them you will have your investment banker contact them. This one buyer middle ground is not a good place for you or your company.

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For Business Owners Seeking Strategic Value in Their Company Sale

Have you ever marveled at the prices at which some companies sell while most others sell at predictable valuation metrics. Much of this value creation secret is the result of "STRATEGIC ASSETS". These are assets that do not appear on a company balance sheet, yet they are hugely valuable to strategic industry buyers. This checklist will help you identify, nurture, and develop key drivers of transaction value for your eventual business sale.